States owe $30 billion in outstanding loans to feds

In this June 13, 2012 photo, Jose Canales, left, talks to a recruiter as he is accompanied by his wife, Magdel, and daughter Alexamarie at a job fair expo in Anaheim, Calif. (AP Photo/Jae C. Hong)

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Already struggling to cut budgets and pay for services like health care and education, nearly half of the 50 states owe Uncle Sam millions or even billions in outstanding loans.

Twenty-two states and the U.S. Virgin Islands owe the federal government more than $30 billion after borrowing to pay out unemployment benefits.

Over the past three years, states have exhausted their unemployment insurance trust funds as they paid out benefits to the large number of unemployed Americans, who can get up to 99 weeks of unemployment benefits in some states.

“Between 2008 and 2011, $174 billion was paid in unemployment taxes while $450 billion was paid out in benefits, a gap of $276 billion,” according to an article by Joe Henchman, a vice president at Tax Foundation, a nonprofit and nonpartisan tax research organization based in Washington, D.C.

Unemployment insurance is jointly run by the federal government and the states, and employers and employees pay taxes to both federal and state governments. The program is administered by the states while the federal government reimburses the states for administrative expenses. When unemployment is high, benefits are extended, and states unable to pay benefits out of their reserves may borrow from the federal government to do so.

States aren’t expected to pay back these loans for several years, but businesses and employees in many states now face increases in their federal unemployment insurance tax rates because of them.

“This tax is ostensibly levied at a 6.0 percent rate on the first $7,000 of each worker’s earnings, but if a state’s program meets federal guidelines, state UI [unemployment insurance] taxes are credited against up to 90 percent of the federal tax,” Henchman wrote.

However, the federal credit disappears the longer a state’s unemployment insurance program remains insolvent. The 90 percent credit is reduced by 0.3 percentage points each year of insolvency.

“Arizona’s UI program has been insolvent for one year, so employers in that state will see a reduction of 0.3 percentage points of their credit against federal UI tax,” according to Henchman. “The federal UI tax for Arizona employers is thus 0.9 percent, rather than 0.6 percent.”

Likewise, Indiana and South Carolina are in their third year of insolvency and will face increased federal unemployment insurance taxes of 1.5 percent.

In fact, when the recession began in 2008, only 17 states, the District of Columbia, and Puerto Rico had sufficient funds for one year of “high-cost” benefits, while 20 states couldn’t even afford half a year of benefits.

“These higher federal UI taxes, and higher state UI taxes enacted in many states, come at a time when private sector hiring is already at a low level and states are under significant fiscal pressure,” Henchman wrote. “The present method of financing the unemployment insurance system is thus exacerbating negative job growth and tax trends, instead of operating counter-cyclically as the program was intended.”

“Indeed, states generally reduced UI taxes and expanded benefits during good economic times, and are hiking UI taxes and reducing benefits now,” he added.

According to the Department of Labor, more than $30.2 billion in outstanding loans from the Federal Unemployment Account (FUA) exist as of July 11, 2012. The FUA is a loan fund for state unemployment programs to ensure unemployment benefits can continue during an economic downturn.

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